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General Acc. Ins. Co. of America v. State

March 26, 1996

GENERAL ACCIDENT INSURANCE CO. OF AMERICA, PLAINTIFF-APPELLANT,
v.
STATE OF NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTECTION AND JOHN DOE INSURANCE COMPANIES 1 THROUGH 20, DEFENDANTS, AND N.B. FAIRCLOUGH & SON, INC., DEFENDANT AND THIRD-PARTY PLAINTIFF-RESPONDENT, V. HARTFORD INSURANCE COMPANY, INTERSTATE FIRE INSURANCE COMPANY AND CHICAGO INSURANCE; MISSION INSURANCE COMPANY; NATIONAL GRANGE MUTUAL INSURANCE COMPANY; NATIONAL UNION INSURANCE COMPANY; NORTHBROOK INSURANCE COMPANY; RELIANCE INSURANCE COMPANY; AND SELECTIVE INSURANCE COMPANY, THIRD-PARTY DEFENDANTS.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 278 N.J. Super. 412 (1995).

Chief Justice Wilentz and Justices Handler, Pollock, Garibaldi, Stein, and Coleman join in Justice O'Hern's opinion. The opinion of the Court was delivered by O'hern, J.

The opinion of the court was delivered by: O'hern

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

GENERAL ACCIDENT INSURANCE CO. OF AMERICA v. STATE OF NEW JERSEY, DEPARTMENT OF ENVIRONMENTAL PROTECTION, ET AL. v. HARTFORD INSURANCE COMPANY, ET AL.

(A-44-95)

Argued November 28, 1995 -- Decided March 26, 1996

O'HERN, J., writing for a unanimous Court.

The issue on appeal is whether remedial studies conducted in connection with governmentally-mandated environmental cleanups are to be classified as indemnity payments or defense costs under a policy of comprehensive general liability (CGL) insurance.

Ordinarily, liability insurance provisions differentiate between a duty to pay on behalf of the policyholder's sums that the insurance company is obligated to pay as damages because of harms or losses covered by the insurance policy, and the duty to defend the policyholder against any claim for damages. Depending on the policy language, defense costs will either count toward the stated coverage limit of the policy or they will be exclusive of the limit of liability. In cost-exclusive policies, the insurer's coverage obligation can be greater than the indemnity limit.

General Accident Insurance Co. (GAIC) issued a comprehensive general liability and automotive insurance policy to N.B. Fairclough & Son, Inc. (Fairclough) for the period December 31, 1972 to December 31, 1975. The CGL policy provided annual property damage limits of liability of $100,000. During the policy years, Fairclough operated a fuel storage business. In 1974, fuel oil stored on Fairclough's premises leaked and migrated into local ground water. By 1985, investigations by the Department of Environmental Protection and Energy (DEPE) revealed that fifteen nearby homes had petroleum products in their private supply wells. On December 31, 1985, DEPE directed Fairclough to collect and analyze water samples from the contaminated wells and prepare a remedial action plan for the contaminated soil and an investigation and remediation plan for the contaminated groundwater to determine the full extent and degree of contamination at the Fairclough site. In a subsequent directive dated April 8, 1987, the DEPE ordered Fairclough to pay for the extension of water mains to the homes of those residents with contaminated wells and to close and seal the contaminated private supply wells. The estimated cost of this project was $719,400. DEPE informed Fairclough that if it failed to remit payment within thirty days, the DEPE would complete the project using public funds and bring an action against Fairclough for three times the cost of remediation. The DEPE later served an administrative order on Fairclough that required it to submit a remedial investigation/feasibility study (RI/FS) for the site and to analyze and monitor the water supply from all private wells located within the targeted zone. The order also assessed $190,500 in civil administrative penalties.

Relying on its CGL policy, Fairclough demanded that GAIC defend and indemnify it for any claims arising out of the DEPE directives. On September 8, 1987, GAIC filed a declaratory judgment action, asserting that it had no obligation to defend or indemnify Fairclough because none of the property damage cited by DEPE had occurred during the relevant policy period. In addition, GAIC argued that the remedy sought from Fairclough by the DEPE directives fell within the policy's pollution exclusion clause.

In March 1990, during the course of the coverage litigation, Fairclough and GAIC entered a stipulation and consent order providing, among other things, that: 1) GAIC would provide indemnity coverage to Fairclough in an amount not to exceed the aggregate sum of $100,000 for claims other than bodily injury claims related to the site; 2) GAIC would continue to provide Fairclough with a defense of all claims arising out of certain DEPE directives pertaining to the site; and 3) on exhaustion of the $100,000 to indemnity payments, as differentiated from defense payments, GAIC's obligation to provide a defense would terminate.

In January 1994, GAIC brought a motion to enforce litigant's rights, seeking a determination that it owed no further duty to indemnify or defend Fairclough because of the exhaustion of the $100,000 policy limit. GAIC alleged that at the time of the motion, it had paid in excess of $100,000 in response costs pursuant to DEPE directives and administrative orders requiring Fairclough to undertake the remedial investigation of petroleum contamination at its former fuel storage site. GAIC argued that the response costs constitute damages under CGL policy and are, therefore, indemnification costs, not defense costs. The trial court agreed and granted GAIC's motion. The Appellate Division reversed, maintaining that the plain language of the policy encompassed remedial investigation costs.

The Supreme Court granted General Accident's petition for certification.

HELD: In this case, mandated remedial investigation and feasibility study costs should be fairly allocated between the defense and indemnity provisions of a comprehensive general liability insurance policy.

1. Environmental-response costs and remediation expenses constitute sums that the policyholder will have to pay as damages within the meaning of the CGL policies at issue. Coverage does not hinge on the form of action taken or on the nature of relief sought, but on the actual or threatened use of legal process to coerce payment or conduct by a policyholder. The New Jersey Spill Compensation and Control Act is coercive in that it provides that a potentially responsible party (PRP) that refuses to comply with a DEPE directive to provide and RI/FS may be subject to treble damages if found responsible for the pollution. (pp. 10-11)

2. Fortuity should not dictate the outcome of the controversy. A legal result should be the same regardless of the circumstances under which the expenditures were made. In this case, fortuity cuts both ways. GAIC may consider it fortuitous that DEPE ordered Fairclough to conduct an RI/FS because the insurance company might thereby avoid financial responsibility for investigative defense costs that it would otherwise be bound contractually to furnish. On the other hand, it may be fortuitous for the policyholder that the extraordinary costs for remedial investigations be absorbed by an insurance company regardless of its policy limits. (pp. 11-17)

3. One of the dominant themes in insurance law is that the outcome should fulfill the fair expectations of the parties. Policyholders generally expect that a careful investigation of their potential liability would be provided by their insurer pursuant to its duty to defend against any claims and most insurance companies expect that they will incur these expenses. That the government orders a policyholder to perform remedial investigations does not change the character of the work or the initial expectations of the parties. The more difficult question is whether a policyholder could fairly expect that an insurance company would bear limitless liability to perform remedial investigations when those investigations were incidental to a mandated environmental cleanup. (pp. 17-18)

4. Here, the proper solution appears to be a fair allocation of the RI/FS costs between the defense and indemnity provisions of the policy. There should be a presumption that mandated costs are indemnity costs to be allocated to the indemnity provisions of the policy. The burden should be on the policyholder to show that the insurance company has derived an unjust benefit from such an allocation to the extent that it has relieved the insurance company of an expense that it would otherwise have incurred under its obligation to defend. Unless resolved through avenues of alternative dispute resolution, trial courts have broad discretion to determine, based on written submissions without any additional expert testimony, a fair allocation of the costs between the defense and indemnity provisions of the policy. The scope of review of the trial court's allocations shall be limited by principles of appellate review. (pp. 19-23)

Judgment of the Appellate Division allocating all the costs of the RI/FS to the defense provisions of the policy is REVERSED. The matter is REMANDED to the Law Division to make a fair allocation of the RI/FS costs between the defense and indemnity provisions of the policies.

CHIEF JUSTICE WILENTZ and JUSTICES HANDLER, POLLOCK, GARIBALDI, STEIN and COLEMAN join in JUSTICE O'HERN's opinion.

The opinion of the Court was delivered by O'HERN, J.

"In the arena of environmental insurance law, it sometimes appears that just as soon as one issue of importance is resolved, like Hydra, the many-headed serpent in Greek mythology, at least two new issues arise to replace it." Jeffrey L. Fillerup & Dominic S. Nesbitt, The Duty to Defend: Post-Montrose Issues, 718 PLI/Comm. 49 (PLI Commercial Law and Practice Course Handbook Series No. 4477, May-June 1995).

A new issue that has arisen is whether remedial studies conducted in connection with governmentally-mandated environmental cleanups are to be classified as indemnity payments or defense costs under a policy of comprehensive general liability (CGL) insurance. Ordinarily, liability insurance provisions differentiate clearly between a duty to pay on behalf of the policyholder sums that the insurance company is obligated contractually to pay as damages because of harms or losses covered by the insurance policy, and a duty to defend the policyholder against any claim for damages. Liability ...


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